A Good Return on Patient Money

By Michael Lombardi, MBA Published : May 9, 2006

Let’s face the facts:

With a dividend yield of 2.15% and a price/earnings ratio of 20, big stocks are not cheap. Yes, stocks have been moving up in price. And I always say the trend is your friend. Hence, I wouldn’t be shorting stocks at this point. But the value just isn’t there. Stocks are generally expensive. Eventually, I believe the 15 interest rate hikes the U.S. has experienced will catch up with the stock market.

Same story with investment real estate: With interest rates having risen so aggressively in the U.S., investors are no longer snapping up properties for investment purposes. Why buy a property with a 6% return on investment when you can purchase a six-month U.S. government guaranteed T-bill that pays 5.02%? If six months is too long for you, 90-day T-bills pay 4.87%.

And this really brings me to my point of the day. 5.02% guaranteed is a good return for patient money.

Tomorrow the U.S. Federal Reserve will raise interest rates again. Can you believe it? Tomorrow will mark the 16th time in a row the Fed has raised interest rates. As an avid investor, I can tell you those rate hikes are really taking a toll the real estate market in the U.S. The stock market hasn’t been hit yet, but it may only be a matter of time before reality sets in.

And that reality is this: American consumers can’t continue spending so aggressively with interest rates having risen so much. The U.S. dollar is so weak that medium to long-term U.S. Treasuries (the ones foreigners most buy) are offering the highest yield in four years.

My take home message is that 5% on short-term government backed paper is a good alternative for patient investors at this point in our economic cycle. Will stocks offer better value at some point down the road for value investors? Definitely. Will investment real estate offer better returns for patient money in the months and years ahead? Definitely. So why not wait it out safely for now?